A personal loan is a debt, secured or unsecured, acquired by an individual for personal reasons, such as the purchase of a car, to assist with an emergency, or to pay college tuition. These do not include business loans and real estate mortgages. Personal loan companies are financial institutions which grant personal loans. Some finance companies may offer a variety of products while others cater to just one particular type of transaction, such as auto purchases or payday cash advances.
Collateral is property which is used as security for a debt. For example, when a company makes a vehicle loan, they record a lien against the title of the car until the loan is paid. Personal loan companies will generally offer lower interest rates and better terms for loans which have collateral because their risk is lower; if the buyer defaults, the company can repossess the property. If the collateral is an appliance or some other property that does not have a recorded title, the interest rate will be a bit higher to accommodate the increased risk.
Another type of secured loan is a savings account loan. The lending institution will require the customer to open a savings account for the amount of the loan. As long as the loan is outstanding, the borrower will be required to keep enough funds in the savings account to cover the amount of the debt. This type of loan is generally short-term and is frequently used by someone who is trying to establish or repair his credit rating.
Many personal loan companies specialize in unsecured loans, often called signature loans. Student loans are an example of an unsecured loan, and may require payment beginning immediately or may delay payment until the borrower is out of school. Debt consolidation is a popular product offered by personal loan companies. The money borrowed is used to pay off credit cards or other debts with a higher interest rate and reduce the amount of time needed to pay off the balance. Debt consolidation can help a person regain control over his finances as long as he is willing to be disciplined and pay off the loan without acquiring more high interest debt.
Other personal loan companies specialize in payday loans or instant cash loans. These companies verify employment but do not use credit reports as a part of the loan process. They require the borrower to either leave a post-dated check or a bank draft authorization for the entire amount of the principal and interest to be processed on the nest pay period. While these may be helpful in emergencies, they are extremely costly with fees running from 15% to 25% for just two weeks. If the loan is extended, the fee continues to double with each extension, and can quickly become greater than the amount originally borrowed.
Part of a good financial plan involves establishing a habit of saving so a person can have money available for emergencies, purchases, vacations, etc. But sometimes a personal loan is necessary to acquire transportation needed for work, make emergency repairs or to consolidate debt and prevent damage caused by late payments. Most countries require lenders to provide a written disclosure of terms and rates, so if a person is looking for a loan, then he should take the time to compare the rates and terms offered by different personal loan companies to find the best program for his particular need.
